John R. Bullis: When does business begin for tax purposes?
November 7, 2016
The Tax Court upheld the IRS determination of when an active trade or business begins for tax purposes. Julia Tizard, age 61, is a veteran of U.S. Air Force and a commercial airline pilot. She will be required to retire at age 65. She planned for something to do when she was retired.
In 2010 she researched doing an aviation business in Arizona. She traveled around and found a suitable plane to purchase for aerial photography, charter flights and flight instruction. She bought the airplane Oct. 6, 2010 for $52,000 and added some additional equipment that cost $2,200.
She filed LLC articles of organization and drafted a business plan. She talked with the seller of the airplane about providing services to the seller, but was not hired to do so. She talked with an acquaintance who might be a potential client, but that person moved away and never hired Tizard to provide any services.
She did a Facebook page for the business in 2011, but it was hacked so she gave it up until 2014 when she started it up again.
Whether the activities constituted the carrying on of a business is determined by the facts and circumstances. The Tax Court found Tizard fully intended to start an aviation business with a profit intent and she spent substantial time and money. But, it held her activities in 2010 were not proof of her actually beginning business operations.
She claimed $13,295 of business expenses with no income on her 2010 U.S. Individual Income Tax Return, Schedule C. IRS disallowed her "business loss" saying she did not carry on a business within the meaning and requirements of the tax laws.
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IRS pointed out she did not formally advertise the business to the general public and she did not do anything to try to find paying clients. IRS said she did not establish the business was actually functioning in 2010 and so her activities were not enough to prove she was "in business."
The Tax Court upheld the IRS finding she was not in business in 2010 and the business loss she claimed was not allowed.
If you are thinking of starting a new trade or business to make a profit, maybe her experience will be helpful in listing the things to be done. It is the facts and circumstances of each case that will be used to prove the business is actually being conducted with the intent to make a profit.
Did you hear? "The song I meant to sing is unsung because I have been stringing, unstringing and restringing my instrument," by Anonymous.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.